30-Somethings and Starter Homes

30-Somethings and Starter Homes

Money Under 30. Wow! What a great idea for a blog site. It is very important that young adults get a handle on their assets and debts early in their careers. When a PR person contacted me about an article on starter homes, I took a look.

Oh boy. This could have been written by a Realtor® (that’s not a compliment, coming from me.) Take a look at what Sarah Davis wrote. It all sounds logical, but it comes down to “buy high and maybe sell high (then again, maybe not.)” Her points:

Definition: a starter home is something you’d be happy living in for around five years even if you know you’ll outgrow it. A forever home, on the other hand, is one that you could potentially see yourself living in for the rest of your life, or at least the next 20 or 30 years.

Right.

Benefits of buying a starter home: First of all, interest rates are at historic lows. Yes, they may be low next year or the year after that, but then again, they may not be low. A good mortgage rate isn’t everything, but your rate will impact your monthly payment and how much you’ll pay in interest over the life of the loan.

Your rate will impact your monthly payment, that’s true. But low interest rates drive prices up. When the interest rates do go up, buying power will go down. Lower demand will lead to stagnating or lowered prices. Buying at peak at a low interest rate is still buying at peak.

If you buy at a lower price, but a higher interest rate, you can refinance into a lower interest rate and lower your monthly payments, if rates go down again.

So, wrong, this is buy high because everyone else is mentality.

Another consideration is the inventory of houses on the market, which is low right now. Ideally you want to buy a property that will appreciate (or at least hold its value) so when you sell it a few years down the road you have equity to put into your forever home.

Wrong, more buy high because everyone else is mentality. Low inventory and high demand is a seller-favoring market. Prices are high in that environment and buyer’s negotiation power is limited. There is no reason to expect that appreciation will continue just because you are buying at peak. Factors like rising interest rates, the continued wage stagnation in most of our country, local economic uncertainties (like layoffs at Biogen and State Street Bank), and national and international economic changes can all cause stagnation or decline in prices.

Buying a smaller home that you can’t sell or rent out when you want to move is perhaps the biggest disadvantage of buying a starter home.

That’s very true!

Rentability: Before buying a starter, be clear what the prevailing rental rate is. If you can’t cover the PITI mortgage (principal, interest, tax, insurance), you may be stuck taking a monthly loss.

Your mortgagability: In addition, to trade up you will need the income to cover two mortgages. 33 percent of your income must be more than both the starter house mortgage and the forever house mortgage. You will find it very hard, if not impossible, to find a seller willing to sell his or her forever house to you contingent on you selling or renting your starter house.

Your next down payment: In a hot market, higher down payment buyers are at a better advantage. Anyone with less than 20 percent down have to scale the additional hurdle of PMI (mortgage insurance) standards to get their loan. In our area, a forever house could be $700,000 or more. That’s $140,000 you’ll need, plus moving expenses.

Though real estate is cyclical and will always have its ups and downs, in the long run it may be harder to get that dream home of yours if you don’t get your foot in the real estate door, so to speak.

I stand against starter properties unless my client feels strongly about getting into the market to ride the general appreciation of the real estate market. I believe that the costs of buying and selling are too high. The people who really benefit are Realtors® like me.

Firstly, our area is already very expensive. A starter property is $350,000-$500,000.

Secondly, there are a large number of Baby Boomers (born 1946-1964) who are over-housed in what can be a “forever house.” The trend is that this generation is choosing to stay in a house longer that their parents. However, some will choose to move city-ward (a growing trend.) Others will choose apartments or condos to avoid snow removal, landscaping duties, and energy bills at their larger house.

My advice for 30-somethings remains the same: don’t buy anything you can’t commit at least seven years of living in. Our market is very expensive and not reliable for enough appreciation to cover your costs in less than seven to ten years.